27.11.2020 – FAST kick-off

Risk aversion & Pesticides

What?

Research question: accurate measure of the risk aversion of farmers.

Why?

  • pesticides -> lower variance of returns from farming

  • pesticides applied before pests arrive

  • if farming is a lottery, pesticides reduce its volatility

  • the higher the risk aversion, the higher the pesticide use

What can we learn?

with a precise risk aversion measure…

  1. estimation of subjective costs to farmers of cutting or eliminating pesticides;
  2. amount of pesticides that could be cut by imposing the risk-neutral pesticide use.

How?

State of the art in risk literature is bad

  • low external validity
  • low correlation with questionnaires
  • low correlation with field behavior

This project

develop new risk elicitation measure

  • takes into account noise & cognitive abilities

  • takes into account risk perception

  • possibly look for other theories than EU

  • theory and lab experiments in progress (ANR RETRISK)

  • FAST: application to the field and farmers

Risk perception

Risk perception: a mismatch

  • economists assume subjects share the same risk definition

  • namely:

    • risk as a distribution of probability over outcomes
    • \(EV\) as the average across all possible states of the world
    • risk aversion as diminishing marginal utility of money
    • subjects care about variance
  • but subjects think of risk as probability of a loss

  • do subjects find our tasks risky?
  • We do not know because we assume they do

Have we got the right theory?

Have we got the right theory?

Other theories

  • Spiliopoulos & Hertwig: different decision rules for different contexts
  • Schneider and Sutter: higher moments matter
  • Sunder et al: curvature of utility function not a valid theory
  • Ergodicity economics (Peters et al): drop EV, use time-means

Behavioral Moving Targets

What?

implement, test and propose a behavioral policy with an endogenously reducing target

  • e.g.: target is median pesticide use (t-1) - 10%

Why?

  • bans or fixed thresholds can induce rigidities
  • market fails (externalities)

what about endogenous moving targets? - leverage the impact of social norms for policy compliance & success - endogenous targets could be more effective than exogenous - used in the real world: Italian qualif’, pay-what-you-want platforms

What can we learn?

A lot. We don’t know much about

  • heterogeneity of costs and externalities
  • adjustment cost
  • collusion-proof mechanisms

How?

  1. extend the theory supporting this tool,(heterogeneity, adjustment costs, calbration);
  2. test the mechanism in lab experiments, especially its sensitivity to parameters, heterogeneity, adjustment cost;
  3. test it in the field with actual farmers, and run calibration analysis for the parameters.